World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Friday, January 15, 2010

Equity futures are down this morning, below is a 5 minute chart of the DOW on the left and a 30 minute chart of the S&P on the right:

The reason I’m showing the 30 minute chart is that there is either a double top in play or yet another inverted H&S pattern there. We’ll know if we break above 1,147 on the /ES, in which case we would target roughly 1,167 which is coincidentally our next higher pivot point.

Both the dollar and bonds are up strongly overnight, a combination that is usually not kind to equities. Both oil and gold are down.

CPI came in as forecast showing a .1% month over month growth. The year over year numbers are picking up steam, though, as we are now making comparisons against last year’s nearing bottom. The year over year CPI is now 2.8%, and with oil not coming down I would expect this figure to remain somewhat elevated for the next few months:

HighlightsThe Fed got its wish with the December CPI-inflation is subdued. Headline consumer price inflation eased to 0.1 percent from 0.4 percent in November and matched the market forecast. Core CPI inflation also was soft at 0.1 percent although higher than November's flat reading. The consensus had expected a 0.1 percent rise for the core CPI. Weakness in the CPI was largely in the housing component and especially the shelter subcomponent which was flat and reflected the weak housing market and high vacancy rates in apartments.

Food and energy components were up in the latest month but at a relatively moderate pace for both. Energy rose only 0.2 percent after a 4.1 percent surge in November. Food inflation firmed to 0.2 percent from a 0.1 percent rise in November.

Within the core, housing inflation was flat as was the shelter subcomponent. New vehicle prices fell 0.3 percent but used car & truck prices increased 2.5 percent as the cash for clunkers program took a sizeable segment off the used market. Recreation was down a sharp 0.4 percent in December while a modest 0.1 percent gain in medical care also helped keep the core sluggish. However, apparel rebounded 0.4 percent but followed two months of declines.

Year-on-year, headline inflation jumped to 2.8 percent (seasonally adjusted) from 1.9 percent in November. The core rate was edged up in December to 1.8 percent from 1.7 percent the month before. On an unadjusted year-ago basis, the headline number was up 2.7 percent in December while the core was up 1.8 percent.

Overall, lingering effects of the recession (including a sluggish consumer sector and very weak housing sector) are keeping inflation subdued. Outside of possible gains in food (freeze related) and energy costs (higher crude oil prices), this is likely to continue in coming months.

The Empire State Manufacturing Index rose more than expected to a reading of 15.92, while the consensus expected 13 and last month was only 2.55. Again with Econoday:

HighlightsThe New York Federal Reserve's Empire State report shows solid, accelerating January-to-December growth in the New York manufacturing region. The general business conditions index rose to 15.92 from December's 4.50 (any reading above zero indicates month-to-month growth; the larger the number, the faster the growth). The new orders index really shows improvement, jumping to 20.48 vs. December's 2.77. Shipments, which follow new orders, rose more than 12-1/2 points to 21.07.

Unfilled orders rose in the month, at 2.67 which doesn't sound like much but compares with steep month-to-month contraction in prior months including November's -21.05. With unfilled orders no longer contracting, manufacturers in the region will be drawing on their available capacity and will be less likely to cut workers. In the case of January, the report's sample actually added employees with the index at 4.00 vs. December's -5.26. Evidence that manufacturers are drawing on capacity is offered by the workweek index which rose to 5.33 vs. -5.26 in December. With greater activity, the supply chain will be tested and delivery times will slow as they did in the current report with a reading of 6.67 vs. -2.63 in the prior two months. Inventories are one factor unfortunately that has yet to respond in the region, at -17.33 to extend the cycle's long run of destocking. Employment really won't be improving until manufacturers begin to restock.

This report adds to wide evidence of rising prices for raw materials (especially energy products) as the prices paid index shows the most significant month-to-month change of any reading at 32.00. But manufacturers are absorbing these costs, lacking the pricing power to pass them through to their customers as the prices received index shows little month-to-month change at 2.67.

This report will raise expectations for solid gains in next week's regional report from the Philadelphia Fed, which if it also proves strong will raise expectations for a strong reading in the ISM national manufacturing survey. At 9:15 ET today, the Federal Reserve in Washington will post industrial production data, which includes a key manufacturing component, for the month of December.

The Industrial Production figures for December came in on consensus at .6%, this is down from November’s .8%.

Consumer Sentiment is released at 9:55 Eastern.

There were two significant earnings releases, Intel last night and JPMorgan this morning. Intel beat with much better earnings than forecast, their stock rose further, but had already been run up and has since given back all the gains on the report. Their profit margins were huge, which is great. This was accomplished largely on good prices for chips sold, but the number of chips sold was not that spectacular which may not help the rest of the industry as far as demand.

JPM “earned” $3.3 BILLION for the 4th quarter, that’s $1.1 billion per month! They claim that $1.9 B of it came from investment banking operations. I will only say this – were they to mark their “assets” to market they would have lost enough money that they would not survive. Truly a house of cards, their activities make Enron look like daycare. Yet, their average investment banker will earn roughly $400k this year. Well deserved? Well, I think the ones who deserve that pay are their lobbyists and their accountants.

Let’s talk about the technicals… Keep in mind that today is options expiration and that strange things can happen. Yesterday saw a small move on the McClelland Oscillator which means we can expect a large move today or tomorrow unless we get another small move.

Below is a 60 minute chart of the S&P 500. There is a clear small rising wedge forming that has perfectly contained prices over the past couple of weeks. Rising wedges are bearish and they are usually terminal formations. Sometimes they can overthrow the top boundary, but this pattern does look to be nearly out of time:

Next is a 60 minute chart of the DOW. Same rising wedge. Everything is overbought to the extreme. Volumes are still very low, again this is a historic divergence against price.

Next I want to quote Dr. Robert McHugh from his email update last night, I think he has some very interesting things to say. What he is saying is shocking relative to what the masses are being spooned. I respect his work immensely, he bases his findings on fact and sound logic:

I find it astonishing that ten years later, to the day, the Dow Industrials sit precisely 1,000 points under that closing top level from 2000. That closing top was 11,722.98. The intraday high today, Thursday, January 14th, 2010, and the high for the rally from March 9th, 2009, was 10,723.77. This is astonishing for the obvious reason that they sit an even 1,000 points apart. But, also astonishing is that after ten years, and after the quadrupling of the money supply, the Industrials are down 8.5 percent. Add to that, investment advisor bullish sentiment is currently at an extreme high. Why? Makes no sense. Because a propaganda machine called Wall Street has absolutely snookered the masses, has convinced, maybe even controlled, the Treasury and Fed into policies that the economy is Wall Street, not Main Street.

We believe the third major top of the past decade is imminent. Maybe it happened today. Maybe it comes in two weeks, maybe at our next phi mate turn date in February. The key here is not to pick the exact top. This top will lead to a stock market decline that could be far worse than the past two of the 2000 millenium. The first major decline started on January 14th, 2000, and bottomed October 9th, 2002, a 38 percent plunge. The second major top started on October 9th, 2007 at 14,164.53 (closing basis) and plunged to the March 9th, 2009 bottom at 6,547.05, a 54 percent plunge. The next plunge should start soon and lead to a decline over the next 2 to 4 years, possibly all the way to zero, in stair step fashion, not all at once. The massive Bearish Head & Shoulders tops forming all over the world suggest this downside target, and relentless decline, will accompany world-wide calamity.

Major tops usually are slow, rounded affairs. Prices move slowly into tops, and roll slowly out of them initially. Then prices start to accelerate lower, bounce back a significant portion of the initial loss, then fall hard.

For the year 2009, Commerce reported that Retail Sales fell 6.2 percent versus 2008. This was the largest annual decline in Revenue since government records were started back in 1992, by a mile. The only other year a decline occurred was 2008, down 0.5 percent. This is not evidence of a recovering economy, but rather of a faltering one.

I would not ignore this man’s work. His technicals underscore what I’ve been saying about debt saturation and how we are running out of places to force more debt into the system. In the beginning, the numbers compound slowly, but as you are nearing the end they compound faster and faster. We are seeing that now rocketing from the billions into the trillions. What should you do? Perhaps consider a little silver, gun blue, and gold? That or just try to run with the pack, LOL… Seriously, it’s time to be careful.